Market forces also restrain large swings in demand or supply. There is no need for government intervention if the exchange rate is left to the market. Some countries, such as the United States, intervene to only a small degree, so that the notion of a free-floating exchange rate system comes close to what actually exists in the United States.Ī free-floating system has the advantage of being self-regulating. In practice, all governments or central banks intervene in currency markets in an effort to influence exchange rates. The concept of a completely free-floating exchange rate system is a theoretical one. government, for example, does not intervene in the stock market to influence stock prices. Governments may regulate stock markets to prevent fraud, but stock values themselves are left to float in the market. The relationship between governments and central banks on the one hand and currency markets on the other is much the same as the typical relationship between these institutions and stock markets. In a free-floating exchange rate system, governments and central banks do not participate in the market for foreign exchange. Finally, governments may seek to fix the values of their currencies, either through participation in the market or through regulatory policy. In another system, currency values are allowed to change, but governments participate in currency markets in an effort to influence those values. Values change constantly as the demand for and supply of currencies fluctuate. In one system, exchange rates are set purely by private market forces with no government involvement. There are three broad categories of exchange rate systems. ![]() ![]() ![]() In this section we will examine some common systems and explore some of their macroeconomic implications. The extent and nature of government involvement in currency markets define alternative systems of exchange rates. But governments can influence those exchange rates in various ways. Discuss some of the pros and cons of different exchange rate systems.Įxchange rates are determined by demand and supply.Define the various types of exchange rate systems.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |